Huge potential as Berlin property goes nowhere

BERLIN (Reuters) - Frank Roszak, a good-humored Berlin butcher with a friendly smile, bought a spacious 10-room house in a pleasant suburb just west of the German capital city for $1.3 million about 16 years ago.

A group of old houses covered with graffiti in Berlin's Prenzlauer Berg district July 1, 2007. While real estate values in Britain, Spain, France, the United States and other countries have whipsawed up in the past decade, prices in Germany either barely moved or even fell steadily in some areas such as Berlin. Many factors have weighed on German prices: relatively weak economic growth, a shrinking population, a traditional low rate of home ownership and cheap rent, generous pensions, risk-averse banks; high closing costs; and poor rate of return. REUTERS/Kirill Iordansky

Two years ago he put the two-storey house with its leafy 1.5-hectare garden on the market for 500,000 euros ($790,000). It’s been months since the last prospective buyer left — without making an offer.

“I thought it was a great investment at the time and prices would rise,” said Roszak, whose smile disappears when asked about his un-sellable house. “I thought I was all set to become a property tycoon. Obviously things didn’t work out.”

His is not a tale of suddenly slumping house prices: it’s the property market in Berlin. Other cities may be smarting from softening prices but Berlin, like many parts of Germany, never had a boom and has long been a veritable black hole for investors and a nightmare for homeowners.

“Berlin is a metropolis with provincial prices,” said Christine Schaefer, a property analyst at DZ Bank in Frankfurt.

Of course, there are some advantages to this: there’s no turmoil from the broad market slump, and talk at dinner parties rarely centers on real estate. Also, as real estate agents and some economists note, it gives the market huge potential.

“Isn’t it better to buy into a market that’s come down for a decade than invest in a market where the party’s over?” said Tobias Just, a real estate analyst at Deutsche Bank.

One problem: to realize that potential looks like taking a very long time. Hopes rise, but the market doesn’t.

As real estate values in countries including Britain, Spain and the United States spiraled higher in the last decade, in Germany’s biggest city and the former communist east prices for new houses and apartments fell by an average of 1 percent per year. Prices for existing houses and apartments fell 2 percent per year, according to banking data.

The situation is only marginally better in the more populous and prosperous west, where housing prices have risen by an annual average of less than 1 percent in the last decade.

Many factors have weighed on German prices: relatively weak economic growth, a shrinking population, a traditional low rate of home ownership and cheap rent, generous pensions, risk-averse banks, high closing costs, and — completing the circle — the poor rate of return.

“There are regions in Germany with unstable prices where real estate investments turned out to be far from satisfactory,” said Just. “Prices have fallen in areas where the population shrank or the local economy is weak. It’s a far cry from what’s happened in other countries.”

HOPEFUL

Hardly a die-hard bull, Just at Deutsche Bank hopes the future may yet brighten.

Noting prices in some cities such as Munich have risen steadily if unspectacularly, he said the future for weak spots may not be as dim as the past — especially in Berlin where unemployment is gradually retreating, the oversupply of housing is slowly shrinking and economic growth is picking up.

At Lehman Brothers, the real estate team issued a report in March entitled ‘Finally the comeback of Berlin?’ which — skeptically — highlighted an above-trend rate of rent increases of almost 10 percent over the past four years in the city.

But the fundamental drivers for a market upturn are hard to find in Bohemian Berlin.

While cheap housing has attracted tens of thousands of students, overall the population has remained stagnant at 3.4 million. It has become the home of thousands of artists, actors, filmmakers, musicians and even poets delighted to find such cheap places to live and work.

Yet there is hardly any industry left — many big companies like Siemens moved away after World War Two and during the Cold War. The banking industry resettled in Frankfurt. Also, many government jobs stayed in Bonn.

“A few select areas in Berlin are doing okay but in other parts prices are still practically give-aways,” said Michael Fredebeul, a real estate agent and assessor with 30 years of market experience in North Rhine-Westphalia and Berlin.

The unemployment rate in Berlin is 15 percent, nearly double the national average, and income levels are below average.

On top of that, just 13 percent of Berliners own their own homes — well below an already low German rate of 40 percent. The high level of public-owned housing and accompanying low rents — and high vacancy rates — also depress property prices.

FALSE DAWNS

There was an ephemeral rise in the days immediately after the fall of the Berlin Wall in 1989, but even the federal government’s move back to Berlin in 1999 — creating some 20,000 jobs — has failed to halt the price erosion.

Another false dawn has been foreign bargain-hunters. Thousands have come — from Britain, Ireland and Scandinavia — to snap up homes at what appeared to be breathtakingly cheap prices. Some agents have taken English courses to cope with the undiminished demand from abroad.

The prices are still breathtakingly cheap.

“A friend of mine in Italy called to ask if it were true what she read in a newspaper that you can buy an apartment in Berlin for 50,000 euros,” said Carsten Marchinkowski, a telecoms expert who recently bought a house in a Berlin suburb.

“I told her ‘No, it’s not true’,” he said. “‘You can buy an apartment in Berlin for 20,000 euros.”‘